Allen Head, Queen’s University

Sala 209

“Indebted Sellers, Liquidity and Mortgage Standards”

Coautoreado con Hongfei Sun y Chenggang Zhou

Abstract: The effects of households’ indebtedness on their house-selling decisions are studied in a dynamic model with search in the housing market and defaultable long-term mortgages. In equilibrium, both sellers’ asking prices and time-to-sell increase with the relative size of their outstanding debt. For sellers in financial distress, this behavior results in a positive relationship between debt and their individual risk of default. Prices and time-to-sell determine both the liquidity of the housing market and the aggregate risk of default. As such they determine the extent of profitable lending by competitive lenders. The theory demonstrates the implications of the distribution of indebtedness for the effects of aggregate shocks on house prices, the liquidity of the housing market, and the rate and severity of mortgage default. Calibrated to the U.S. economy, it also generates, as observed, positive correlations (i) across sellers of asking prices with loan-to-value ratios, and (ii) over time of both house prices and time-to-sell with mortgage loan-to-value ratios at mortgage origination.